The Because Effect and the future of Marketing and IPR and maybe even the Net

I have often wondered why we spend so much time wrestling with the issues related to Marketing in the 21st Century, with reframing IPR and DRM, and with “net neutrality“. Why we land up with starkly polarised views and start calling each other names. Blefuscu and Lilliput all over again.

And recently, I’ve begun to think it’s about Doc’s Because Effect. More precisely, it’s about people unable to cope with the Because Effect.

What we are seeing are people who are running scared, paralysed, sometimes not willing, often not able, to make the move from making money with something to making money because of something. So they try and build walls around whatever it is they made money with, and try and build laws that will keep those walls in place, and try and claim that anyone who disagrees is a pinko lefty criminal tree-hugging utopian no-hoping loser.

It is meaningful to say that “product A costs X dollars”. It is meaningful to say that “we have to get Y dollars for the product to cover our own costs of production and have enough left over to cover the cost of capital, and thereby to show an adequate profit.” But it makes no sense at all to conclude, “… and therefore the customer has to pay the lump sum of Y dollars in cash for each piece of product A he buys.”

What Drucker is referring to is the fallacy inherent in directly correlating what a customer pays for with what an enterprise wants, even sometimes needs,Â to receive. Drucker continues:

Rather, the argument should go as follows: “What the customer pays for each piece of the product has to work out as Y dollars for us. But how the customer pays depends on what makes the most sense to him. It depends on what the product does for the customer. It depends on what fits his reality. It depends on what the customer sees as ‘value’ “

That’s what part of the Because Effect is about. Google doesn’t make money from search. It makes money from advertising. So Google gets their “Y dollars”, and “how the customer pays depends on what makes the most sense to him”.

You can see it as part of Christensen’sInnovator’s Dilemma. People didn’t buy encyclopaedias, they assuaged guilt to the tune of $1500. So when they could buy a PC and a disk containing an encyclopaedia for the same $1500, they “paid it, depending on what made the most sense to them”.

You can see it in the kids who pay $4.99 for a ringtone yet won’t pay $15 for a CD.

You can see it everywhere.

Back to Drucker. He said:

Price in itself is not “pricing”, and it is not “value”. But this is nothing but elementary marketing, most readers will protest, and they are right. It is nothing but elementary marketing. To start out with the customer’s utility, with what the customer buys, with what the realities of the customer are and what the customer’s values are — this is what marketing is all about. But why, after forty years of preaching marketing, teaching marketing, professing marketing, so few suppliers are willing to follow, I cannot explain.

What Drucker cannot explain is what I have found hard to understand. And why I am Confused.

Enough about Marketing. Let’s take patents. One way of looking at patents is that they provide an inventor with an artificial monopoly rent. This monopoly rent allows the inventor to create a difference between the cost of production and the price charged to the customer. In effect, the patent allows the inventor to make money with a product rather than because of it. [For a short time, as With moved to Because].

This was reasonable, a short-term artificial basis for inventors and their firms to recoup their investments and their costs of capital. First-mover disadvantage was neutralised and everyone was happy.

But.

In the old days, most of research was done in universities and academic institutions. They thrived on knowledge, on sharing knowledge, it was their life-blood. And, for the most part, they had no patents. Yet they shared ideas. Sometimes the ideas needed considerable capital injections before they could see the light of day as inventions, and so we had patents. In this context you could argue that the monopoly rent was used to offset the costs of research. Perfectly reasonable.

But.

Even then, there was a considerable time delay between the issuance of a patent and the commercialisation of the invention. In many cases the commercial product came into existence around the time the patent was ending anyway. Which meant that the artificial monopoly rent disappeared at the right time.

But.

Now cycle times have changed, the gestation period between concept and patent and commercial product is small. The capital costs have changed, much of the need is intellectual rather than land or capital. Production costs have changed in a digital borderless innovating-on-the-edge networked non-hierarchical world.

Yet.

Patents are still pending while the commercial product meanders towards obsolescence. There are offensive patents, defensive patents, frivolous patents, spam patents, shyster patents trying to take public domain things private, more patents than the population of China. Patents trying to create monopoly rents in order to defray nothing at all.

And so we have high costs to do with patents. More patent lawyers than the population of India and China. An expensive meaningless discovery process. An inability to define what the thing is, an inability to prove or disprove prior art. And guess what, someone needs to recoup all these costs.

Have we reached a stage where the true reason for a patent’s monopoly rent is actually to recoup the costs of the patent process and nothing more? I wonder.

It’s back to The Because Effect. Customers will pay because they get value. It is up to them how they pay. And firms that understand that will land up recouping their costs because they have happy customers. Firms will not recoup their costs via lock-ins and artificial monopolies. Especially costs that shouldn’t exist in the first place. Costs to do with production and distribution. And patents. And windfall expectations.

The same happens when people argue about who is going to pay for Stevens’ Tubes. [By the way, talking about Senator Stevens, have you seen this? Or, in the context of IPR, this? Or, in the context of DRM, this? Laughable.]

A coda: Peter Drucker on Marketing. Again.

….That after twenty years of marketing rhetoric consumerism could become a powerful popular movement proves that not much marketing has been practiced. Consumerism is the “shame of marketing“.

11 thoughts on “The Because Effect and the future of Marketing and IPR and maybe even the Net”

JP, I feel like I ought to start with an Eliza-like reply: “How long have you been Confused?” Seriously, though, I would like to try to take a productive crack at the marketing side of your confusion. If it then leads to the IPR side, so much the better.

So let us begin with Drucker’s quandry. I would argue that, in the world of business Drucker was the quintessential modernist, which is to say that he was an extraordinarily keen observer who could bring just about every rationalist school of thought to bear on the interpretation of his observations. I would say that, for most of the community reading this discussion, this is a virtue with “a price above rubies” (to steal a film title).

For better or worse, however, we no longer live in a strictly modernist world. The reason I have chosen to write this response is that I have spent the last couple of days trying to get my own head around postmodernism. Now that it is beginning to make sense to me, I can start to think about its implications beyond the refined worlds of philosophy and literary theory; and marketing is part of that “beyond.”

My bottom line is that postmodernism has emerged as a result of a general need to cope with uncertainty (and what better source of uncertainty can we find than marketing?). Given that it is very hard for me to resist being a formalist, I would argue that we cannot talk about uncertainty without recognizing that there are actually two independent concepts, both of which are instances of uncertainty:

I like to charactertize the first with my favorite Henry Miller quote: Uncertainty is the “order which is not understood.” We deal with it through what I would call PROVISIONAL UNDERSTANDING. We do this by constructing models (usually probabilistic) based on empirical data (which, hopefully, we collect through sound and disciplined techniques).

The second concept, however, is the order that CANNOT be understood. The best example comes from Heisenberg’s Principle about the uncertainty of measurement. This has the status of a PHYSICAL LAW. However, I would also argue that there are SOCIAL laws about uncertainty that cannot be understood, my favorite example coming from Isaiah Berlin: conflicts of value are inevitable and unresolvable because they are part of “human nature.”

Now, when we are dealing with the first concept, we can strive to reduce uncertainty through formal techniques applied to building and refining models; and, when we do this, we live by putting the theories of modernism into practice.

When confronted with the second concept, we have no such luck; and postmodernism emerged as a school of thought to comfort us in our helplessness. It all goes back to Nietzscheâ€™s commitment to â€œdissolving the presumption that there can be objective knowledgeâ€ (as Simon Blackburn put it in THE OXFORD DICTIONARY OF PHILOSOPHY). Nietzsche then set the stage for Isaiah Berlin being able to argue that Enlightenment thinking was as much grounded in dogma as was Catholicism, and Enlightenment dogma committed us to the belief that every uncertainty was an instance of the first concept. Once Heisenberg blew that dogma out of the water, we had to develop strategies for living with the realty of the second concept; and this is the mission of postmodernism.

Whatever may have come from twentieth-century postmodernism, my personal feeling is that the best strategy can still be traced back to Nietzsche and his conviction that FICTIONS are indispensable for life and the actions we take in the course of our lives. So it is that Drucker could never explain why suppliers would hang THEIR strategies on a fiction, no matter how good he was at expounding on fundamental hard-core facts of marketing. Sometimes logic just does not cut the mustard. Perhaps, at the end of the day, marketing is one of those uncertainties that really CANNOT be understood; and consumerism is just a strategy for coping with such a “second-concept” uncertainty.

If you have followed me this far, then, hopefully you will at least acknowledge the premise that the value of a patent may also be a “second-concept” uncertainty. Here, however, I would like to propose a postmodernist take on Wittgenstein’s language games. We are all familiar with playing games in which we “make moves” as a means of “buying information.” (I guess both poker and bridge are the classic examples.) I would argue that we can do the same thing with our language games; and, in some settings, that may be the only strategy we have for dealing with “second-concept” uncertainties like the value of a patent. That is WHY we now have a typology that includes offensive, defensive, frivolous, spam, and shyster patents. These are nothing more than “language game moves” for dealing with “second-concept value uncertainty!”

Is all this way too far off the wall? Perhaps it is. Perhaps it is just another postmodern strategy for dealing with second-concept uncertainty! If so, it is just another language game; and the next move is yours!

Sometimes I delude myself that I’m a reasonably smart guy … then I check out JP and his fellow conversationalists (particularly Stephen) and understand more fully the wretched paucity of thinking I really bring to bear!

John, the Drucker view is that consumerism is a response to failures in marketing. The way he says it does not, in my opinion, leave room for misinterpretation. By all means take a look and see what you think.

JP, first of all I do not think I would characterize my personal worldview as postmodernist. (I suspect that some of the more serious postmodernists out there would take issue with my precis. However, the MOST serious of them will not speak out against me, because they would see that as a contradiction of their philosophical convictions!) Personally, I throw my lot in with the Isaiah Berlin position I summarized above: conflicts of value are inevitable and unresolvable because they are part of â€œhuman nature.â€ I further believe that this is not cause for despair but encouragement for conversation, just as long as we recognize that conversation does not always end in consensus!

So let me try to address your question on the basis of my ongoing attempt to analyze the postmodernist position. The general question, as I see it, is: How to we ground the concepts behind the terminology that grounds our conversations? In this forum we happen to be having conversations about concepts like “freedom,” “the market,” and “risk;” but the answer to the question should generalize to just about any other concept, be it “love,” “art,” “community,” or what have you.

I would argue that the postmodernist answer to this question involves a synthesis of the contributions of Wittgenstein and Nietzsche that I cited above. From Wittgenstein we get the thesis that, at the end of the day, concepts are never “grounded.” They assume their semantic interpretations on the basis of the moves we make in the language games of our conversations; and, as I tried to indicate, we actually do a lot of things with those language games. As a matter of fact, to borrow a page from Anthony Giddens, I would say that we use those games (at least) to signify, to dominate, and to legitimate. This takes us over to the Nietzsche contribution to the formula, which involves the necessity for FICTION. If our conversations are motivated by our observations and our experiences, they are not limited to RENDERING those observations and experiences through language; they also involve FABRICATIONS, because those are “language game moves,” too.

I suppose I first started going down this path when I first encountered John Kenneth Galbraith’s treatise on money (long before I ever encountered names like Derrida and Foucault). My take-away from that treatise was that money is what it is as a product of the conversations we have over it and the exchanges resulting from those conversations. (Galbraith did not put it that way, but I do not think I have violated the basic thrust of his reasoning. Instead, I have resorted to a FABRICATION to illustrate how that reasoning relates to the points of the previous paragraph. See how the game works?) Of course what Galbraith said about money can also be said about the underlying concept of “value” (and, for that matter, the concepts of “market” and “risk” that you posed).

As far as “freedom” is concerned, let me be bold enough to posit that Rousseau was invoking fictions in his language games about freedom long before it made sense to have a conversation about “the postmodern condition!” Thus, to build on your own assertion, it is not that “second-concept” uncertainties have created an environment without freedom but that, within that environment, both our freedoms and our chains are emergent properties of the moves we make in our language games (as they have always been?). More importantly, those language games are the primary (only?) instrument we have that can check threats to rationality, such as groupthink (and its “cousins,” such as fundamentalism and rankism).

By the way, it you are interested in a take on all of this from someone who is more of a “card-carrying postmodernist” than I am, I would recommend your taking a look at the book CONFIDENCE GAMES: MONEY AND MARKETS IN A WORLD WITHOUT REDEMPTION by Mark C. Taylor, published by the University of Chicago Press in 2004.

Aha – Drucker’s consumerism is different from my use of the word. I assumed he was talking about the tendency for people to engage in retail therapy where he was in fact referring to consumer activism. On that definition of consumerism, I unsurprisingly agree with his argument completely since my blog is wholly about how marketing is misunderstood, not least by many alleged marketers.

I’m not sure we still live in a postmodern world. To my mind, postmodern culture was characterised by irony, cynicism, deconstruction and self-referential wittiness. I’m glad personally that we seem to have left those things behind in the unlamented 1990s.

It seems to me that today you can represent yourself with humility, sincerity and openness without suffering for it. And indeed that those values are increasingly recognised as the foundation for some kind of success, or at least productivity.

If modernism was the reduction of things to their basic functional elements, and postmodernism the knowing use of those elements in a somewhat arbitrary way, then hopefully post-postmodernism is the recognition that we have had our playtime and it’s time to put the functional elements to the best and simplest use we can.

Dominic, we seem to be writing from opposite sides of the Atlantic Ocean; so this may just be an example of how our worlds differ. (Also, without trying to take the discussion to a personal level, I have to cite with a bit of playful amusement a recent comment by a British academic about the inclination of his colleagues to treat postmodernism as a “Continental aberration” in the history of ideas!) However, if you REALLY believe “that today you can represent yourself with humility, sincerity and openness without suffering for it,” then you may not have had the opportunity to see or hear the interview with Bill Clinton on Fox News Sunday. Fortunately, the transcript has been posted by Think Progress:

Over here I believe that the United States has a history of sustaining itself on “fictions of convenience” that reaches back way before “postmodern” entered our vocabulary. I am not sure I can easily track down its origins; but the first example that had an impact on me was Malcolm Cowley’s description of the primary narrative of William Faulkner’s ABSALOM, ABSALOM! as “a long and violent story that he regards as the essence of the Deep South, which is not so much a mere region as it is … an incomplete and frustrated nation trying to relive its legendary past.” The operative word there is “legendary,” as in the most memorable line from THE MAN WHO SHOT LIBERTY VALANCE (hardly a postmodern classic): “When the legend becomes fact, print the legend.” (J. Hillis Miller actually continued Cowley’s argument by demonstrating the key role of “fictions of convenience” in the SECONDARY narrative 0f ABSALOM, ABSALOM!) So, while playtime may be over in the United Kingdom (which I would be the first to applaud), the games continue over here and the stakes keep getting higher, whether you are talking about policy-making in the public sector or the conduct of business in the private!

Stephen, you are mostly right of course. All I meant was that the opportunity now exists to stop playing the games. Plenty of people are still stuck in their cynical mindset, a majority even. You are talking about the whole sweep of postmodern thought, about which I am not qualified to comment. I was really just referring to postmodern culture and its behaviours. That mindset still exists but I claim it has peaked.

I just think there are a growing number of people who believe that trust is something of value to everybody (not blind trust but educated trust). And behaving in a way that engenders trust is a good plan.

Even the Australian cricket team have pretty much stopped sledging their opponents. They have stopped deriving any value from that tactic because it is ultimately a zero-sum game once everybody knows how to play it. As a cricketer in the 1990s I would never have “walked”, I would wait for the umpire to give his decision. Nowadays I’m not so sure. I hope I would walk when I knew I was out in the hope that the umpire would know my reputation for fairness and not dismiss me when there was reasonable doubt in his mind. If everybody plays this game, everybody wins. If a minority try to exploit it then their reputation ultimately suffers.

This isn’t just altruistic hippydom. I’m talking about the same culture used by poker players in a Wild West saloon. Trust is everything. If you cheat then peer pressure does its talking with a six-shooter.